Hall, Jamie (2012): Consumption dynamics in general equilibrium.

PDF
MPRA_paper_43933.pdf Download (479kB)  Preview 
Abstract
This paper explores the role of consumption habits using an estimated nonlinear dynamic stochastic general equilibrium (DSGE) model with heteroscedastic shocks. It finds that habits interact with timevarying volatility to produce a better and more plausible fit to the data. They accentuate the nonlinear character of the simple New Keynesian model to produce asymmetries between positive and negative shocks. In general equilibrium, these effects are transmitted as much through inflation as through consumption itself.
Item Type:  MPRA Paper 

Original Title:  Consumption dynamics in general equilibrium 
Language:  English 
Keywords:  New Keynesian, habits, particle filter, heteroscedastic 
Subjects:  E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E32  Business Fluctuations ; Cycles E  Macroeconomics and Monetary Economics > E2  Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21  Consumption ; Saving ; Wealth 
Item ID:  43933 
Depositing User:  Jamie Hall 
Date Deposited:  22 Jan 2013 05:44 
Last Modified:  26 May 2017 12:04 
References:  Abel, A. B. (1990): “Asset Prices under Habit Formation and Catching up with the Joneses,” The American Economic Review, 80(2), 38–42. Adjemian, S., H. Bastani, F. Karame, M. Juillard, J. Maih, F. Mi houbi, G. Perendia, M. Ratto, and S. Villemot (2012): “Dynare: Reference Manual, Version 4,” Dynare Working Paper 1, CEPREMAP. Akaike, H. (1974): “A new look at the statistical model identification,” IEEE Transactions on Automatic Control, 19(6), 716 – 723. Amisano, G., and O. Tristani (2010): “Euro area inflation persistence inan estimated nonlinear DSGE model,” Journal of Economic Dynamics and Control, 34(10), 1837–1858. Amisano, G., and O. Tristani (2011): “Exact likelihood computation for nonlinear DSGE models with heteroskedastic innovations,” Journal of Economic Dynamics and Control, 35(12), 2167–2185. Andreasen, M. M. (2011): “An Estimated DSGE Model: Explaining Variation in Nominal Term Premia, Real Term Premia, and Inflation Risk Premia,” SSRN eLibrary. Andrieu, C., A. Doucet, and R. Holenstein (2010): “Particle Markov chain Monte Carlo methods,” Journal of the Royal Statistical Society: Series B (Statistical Methodology), 72(3), 269–342. Binsbergen, J. v., J. FernandezVillaverde, R. S. J. Koijen, and J. F. RubioRamırez (2010): “The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences,” Working Paper 15890, National Bureau of Economic Research. Braun, R. A., L. M. Korber, and Y. Waki (2012): “Some Unpleasant Properties of LogLinearized Solutions When the Nominal Rate Is Zero,” Working Paper 20125a, Federal Reserve Bank of Atlanta. Calvo, G. A. (1983): “Staggered prices in a utilitymaximizing framework,” Journal of Monetary Economics, 12(3), 383–398. Campbell, J. Y., and J. H. Cochrane (1999): “By Force of Habit: A ConsumptionBased Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy, 107(2), 205–251. Carroll, C. D., J. Slacalek, and M. Sommer (2008): “International Evidence on Sticky Consumption Growth,” Working Paper 13876, National Bureau of Economic Research. Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005): “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy, 113(1), 1–45. Cochrane, J. H. (2008): “Financial Markets and the Real Economy,” in Handbook of the Equity Risk Premium, ed. by R. Mehra, pp. 237–325. Elsevier, San Diego. Cochrane, J. H. (2011): “Presidential Address: Discount Rates,” The Journal of Finance, 66(4), 1047–1108. Dennis, R. (2009): “Consumption Habits in a New Keynesian Business Cycle Model,” Journal of Money, Credit and Banking, 41(5), 1015–1030. Doh, T. (2011): “Yield curve in an estimated nonlinear macro model,” Journal of Economic Dynamics and Control, 35(8), 1229–1244. Dong, B. (2012): “Mystery at the zero lower bound,” Mimeo, University of Virginia. Edge, R. M., M. T. Kiley, and J.P. Laforte (2008): “Natural rate measures in an estimated DSGE model of the U.S. economy,” Journal of Economic Dynamics and Control, 32(8), 2512–2535. Fang, H.r., and Y. Saad (2009): “Two classes of multisecant methods for nonlinear acceleration,” Numerical Linear Algebra with Applications, 16(3), 197–221. FernandezVillaverde, J., G. Gordon, P. A. GuerronQuintana, and J. RubioRamirez (2012): “Nonlinear Adventures at the Zero Lower Bound,” National Bureau of Economic Research Working Paper Series, No. 18058. FernandezVillaverde, J., and J. RubioRamirez (2006): “A Baseline DSGE Model,” Mimeo, University of Pennsylvania. FernandezVillaverde, J., and J. RubioRamirez (2010): “Macroeconomics and Volatility: Data, Models, and Estimation,” National Bureau of Economic Research Working Paper Series, No. 16618. FernandezVillaverde, J., and J. RubioRamirez (2007a): “Estimating Macroeconomic Models: A Likelihood Approach,” The Review of Economic Studies, 74(4), 1059–1087. FernandezVillaverde, J., and J. RubioRamirez (2007b): “How Structural Are Structural Parameters?,” National Bureau of Economic Research Working Paper Series, No. 13166. Frederick, S., and G. Loewenstein (1999): “Hedonic adaptation,” in Wellbeing: The foundations of hedonic psychology, ed. by D. Kahneman, E. Diener, and N. Schwarz, pp. 302–329. Russell Sage Foundation, New York, NY, US. Gali J. (2008): Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton University Press. Gelfand, A. E., and D. K. Dey (1994): “Bayesian Model Choice: Asymptotics and Exact Calculations,” Journal of the Royal Statistical Society. Series B (Methodological), 56(3), 501–514. Geweke, J. (1999): “Using simulation methods for Bayesian econometric models: inference, development,and communication,” Econometric Reviews, 18(1), 1–73. Haario, H., E. Saksman, and J. Tamminen (2001): “An Adaptive Metropolis Algorithm,” Bernoulli, 7(2), 223–242. Hall, J. (2012): “Rapid estimation of nonlinear DSGE models,” Mimeo, UNSW. Hall, R. E. (1978): “Stochastic Implications of the Life CyclePermanent Income Hypothesis: Theory and Evidence,” Journal of Political Economy, 86(6), 971–987. Justiniano, A., and G. E. Primiceri (2008): “The TimeVarying Volatility of Macroeconomic Fluctuations,” The American Economic Review, 98(3), 604–641. Lucas, R. E. (1972): “Expectations and the neutrality of money,” Journal of Economic Theory, 4(2), 103–124. Mankiw, N. G., and R. Reis (2002): “Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,” The Quarterly Journal of Economics, 117(4), 1295–1328. Mehra, R., and E. C. Prescott (1985): “The equity premium: A puzzle,” Journal of Monetary Economics, 15(2), 145–161. Muellbauer, J. (1988): “Habits, Rationality and Myopia in the Life Cycle Consumption Function,” Annals of Economics and Statistics / Annales d’Economie et de Statistique, (9), 47–70. Pitt, M. K., and N. Shephard (1999): “Filtering via Simulation: Auxiliary Particle Filters,” Journal of the American Statistical Association, 94(446), 590–599. Pitt, M. K., R. d. S. Silva, P. Giordani, and R. Kohn (2012): “On some properties of Markov chain Monte Carlo simulation methods based on the particle filter,” Journal of Econometrics, 171(2), 134–151. Pollak, R. A. (1978): “Endogenous Tastes in Demand and Welfare Analysis,” The American Economic Review, 68(2), 374–379. Rudebusch, G. D., and E. T. Swanson (2012): “The Bond Premium in a DSGE Model with LongRun Real and Nominal,” American Economic Journal: Macroeconomics, 4(1), 105–143. Schwarz, G. (1978): “Estimating the Dimension of a Model,” The Annals of Statistics, 6(2), 461–464. Shnayerson, M. (2009): “Profiles in Panic,” Vanity Fair, (January). Sims, C. A. (2003): “Implications of rational inattention,” Journal of Monetary Economics, 50(3), 665–690. Smets, F., and R. Wouters (2003): “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area,” Journal of the European Economic Association, 1(5), 1123–1175. Smets, F., and R. Wouters (2007): “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach,” American Economic Review, 97(3), 586–606. Spiegelhalter, D. J., N. G. Best, B. P. Carlin, and A. Van Der Linde (2002): “Bayesian measures of model complexity and fit,” Journal of the Royal Statistical Society: Series B (Statistical Methodology), 64(4), 583–639. Taylor, L. D., and H. S. Houthakker (2009): Consumer Demand in the United States: Prices, Income, and Consumption Behavior. Springer. Walker, H. F., and P. Ni (2011): “Anderson Acceleration for FixedPoint Iterations,” SIAM J. Numer. Anal., 49(4), 1715–1735. Walsh, C. E. (2003): Monetary Theory and Policy. MIT Press, 2nd edn. Woodford, M. (2001): “Imperfect Common Knowledge and the Effects of Monetary Policy,” Working Paper 8673, National Bureau of Economic Research. Woodford, M. (2003): Interest and prices: Foundations of a theory of monetary policy. Princeton University Press, Princeton, NJ. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/43933 